FOMC Minutes

9/20/77

Meeting of Federal Open Market Committee

September 20, 1977

MINUTES OF ACTIONS

A meeting of the Federal Open Market Committee was

held in the offices of the Board of Governors of the Federal

Reserve System in Washington, D. C.,

on Tuesday, September 20,

1977, beginning at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Burns, Chairman

Volcker, Vice Chairman

Coldwell

Gardner

Guffey

Jackson

Lilly

Mayo

Morris

Partee

Roos

Wallich

Messrs. Balles, Baughman, Eastburn, and Winn,

Alternate Members of the Federal Open Market

Committee

Messrs. Black, Kimbrel, and Willes, Presidents of

the Federal Reserve Banks of Richmond,

Atlanta, and Minneapolis, respectively

Mr. Broida, Secretary

Mr. Altmann, Deputy Secretary

Mr. Bernard, Assistant Secretary

Mr. O'Connell, General Counsel

Mr. Axilrod, Economist

Messrs. Balbach, T. Davis, Eisenmenger,

Ettin, Kichline, Reynolds, Scheld, and

Truman, Associate Economists

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9/20/77

Mr. Holmes, Manager,System Open Market

Account

Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Sternlight, Deputy Manager for Domestic

Operations

Mr. Hudson, Assistant to the Chairman,

Board of Governors

Messrs. Coyne and Keir, Assistants to the

Board of Governors

Mrs. Farar, Economist, Open Market Secretariat,

Board of Governors

Miss Klaput, Open Market Secretariat, Board

of Governors

Messrs. J. Davis and Parthemos, Senior Vice

Presidents, Federal Reserve Banks of

Cleveland and Richmond, respectively

Messrs. Brandt, Burns, Fousek, Kaminow, and

Keran, Vice Presidents, Federal Reserve

Banks of Atlanta, Dallas, New York,

Philadelphia, and San Francisco,

respectively

Mr. Kareken, Economic Adviser, Federal

Reserve Bank of Minneapolis

Ms. Clarkin, Securities Trading Officer,

Federal Reserve Bank of New York

By unanimous vote, the minutes of actions taken at the

meeting of the Federal Open Market Committee held on August 16,

1977, were approved.

By unanimous vote, System open market transactions in

foreign currencies during the period August 15 through September

19, 1977, were approved, ratified, and confirmed.

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9/20/77

By unanimous vote, System open market transactions in

Government securities, agency obligations, and bankers

acceptances during the period August 15 through September 19,

1977, were approved, ratified, and confirmed.

With Messrs. Lilly, Morris, Roos, and Wallich dissenting,

the Federal Reserve Bank of New York was authorized and directed,

until otherwise directed by the Committee, to execute transactions

in the System Account in accordance with the following domestic

policy directive:

The information reviewed at this meeting

suggests that real output of goods and services

has grown less rapidly in the current quarter

than in the second quarter. In August industrial

output declined by about as much as it had risen

in July. Employment increased moderately but the

labor force rose more and the unemployment rate

edged up to 7.1 per cent, the same as in June.

The dollar value of total retail sales, which had

turned up in July, rose appreciably in August.

The wholesale price index for all commodities was

about unchanged; average prices of farm products

and foods declined sharply for the third successive

month, and average prices of industrial commodities

continued to rise at a more moderate pace than in

the early months of 1977. So far this year the

index of average hourly earnings has advanced at

about the same pace as it had on the average

during 1976.

The weighted average exchange rate for the

dollar against leading foreign currencies has

recovered further in recent weeks, returning to

the level of late June. In July the U. S. foreign

trade deficit was at about the second-quarter rate,

and there were sizable net inflows of foreign

private and official capital.

9/20/77

- 4 Growth in M-1 and M-2 slowed in August from

the exceptionally rapid rates in July. Expansion

of both demand deposits and time and savings deposits

at banks slackened. Growth in M-3 also slowed,

although inflows to nonbank thrift institutions

remained strong. Business short-term borrowing

increased somewhat from the reduced pace in July,

but remained below the volume of preceding months.

Short-term interest rates, which had risen

appreciably in early August, most recently have

advanced somewhat further. Yields on longer-term

market securities, however, have changed little

on balance in recent months. Federal Reserve

discount rates were increased from 5-1/4 to 5-3/4

per cent in late August and early September, and

member bank borrowings receded from the high levels

of the latter part of August.

In light of the foregoing developments, it is

the policy of the Federal Open Market Committee to

foster bank reserve and other financial conditions

that will encourage continued economic expansion

and help resist inflationary pressures, while

contributing to a sustainable pattern of inter

national transactions.

At its meeting on July 19, 1977, the Committee

agreed that growth of M-1, M-2, and M-3 within

ranges of 4 to 6-1/2 per cent, 7 to 9-1/2 per cent,

and 8-1/2 to 11 per cent, respectively, from the

second quarter of 1977 to the second quarter of

1978 appears to be consistent with these objectives.

These ranges are subject to reconsideration at any

time as conditions warrant.

The Committee seeks to encourage near-term

rates of growth in M-1 and M-2 on a path believed

to be reasonably consistent with the longer-run

ranges for monetary aggregates cited in the pre

ceding paragraph. Specifically, at present, it

expects the annual growth rates over the September

October period to be within the ranges of 2 to 7

per cent for M-1 and 4 to 8 per cent for M-2.

In

the judgment of the Committee such growth rates

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are likely to be associated with a weekly-average

Federal funds rate of about 6-1/4 per cent.

If,

giving approximately equal weight to M-1 and M-2,

it appears that growth rates over the 2-month

period will deviate significantly from the mid

points of the indicated ranges, the operational

objective for the Federal funds rate shall be

modified in an orderly fashion within a range

of 6 to 6-1/2 per cent.

If it appears during the period before the

next meeting that the operating constraints

specified above are proving to be significantly

inconsistent, the Manager is promptly to notify

the Chairman who will then decide whether the

situation calls for supplementary instructions

from the Committee.

It was agreed that the next meeting of the Committee

would be held on Tuesday, October 18, 1977, beginning at 9:30

a.m.

The meeting adjourned.

Secretary's Note:

On September 30, 1977, Committee members voted to

increase from $2 billion to $3 billion the limit on Federal Reserve

Bank holdings of special short-term certificates of indebtedness

purchased directly from the Treasury specified in paragraph 2 of

the Authorization for Domestic Open Market Operations, effective

immediately.

Votes for this action:

Messrs.

Burns, Coldwell, Gardner, Guffey,

Jackson, Lilly, Mayo, Partee, Roos,

Wallich, Eastburn and Timlen. Votes

against this action;

None.

(Messrs.

Eastburn and Timlen voted as alternates

for Messrs. Morris and Volcker, respectively.)

Secretary